If you’re thinking of buying a car, then you’ll probably have heard the terms PCP and HP being bandied about. While it’s probably obvious that they’re both types of finance – i.e., alternative methods of buying the car without paying the overall list price in one large, outright chunk – it might not be clear about the benefits and drawbacks of PCP and HP. So what is PCP? What is HP? And which one is best for you?
What is it?
PCP stands for Personal Contract Purchase, although it is also sometimes referred to as a Personal Contract Plan.
How does it work?
Hugely popular with car buyers in recent years, this is a form of Hire Purchase (see below) that runs over a fixed contract period, the most common being three years. With PCP, you pay a deposit of your choice, which can be anything between nothing and up to (typically) 35 per cent of the value of the vehicle’s list price plus any optional extras chosen. You then choose the length of time you wish to keep the car, plus how many kilometres per annum you’re going to cover and, from this the car company’s financial department works out what the vehicle will be worth as a minimum at the end of the agreement; this is called the Guaranteed Minimum Future Value (GMFV) and it’s an important figure – so, for example, if you say you want a car over three years and you’ll do 10,000km per year, the GMFV will be pegged at what financial experts predict that particular model will be worth when it’s three years old with 30,000km on the clock. Optional extras fitted can positively affect the GMFV, hence why they’re taken into account when calculating the PCP. Please note that your vehicle will be valued by the salesperson at that time as normal. If there is a settlement or GMFV owing on this car it will be deducted from to trade-in evaluation and any equity will be carried over into your next deal.
At the end of the contract you have three options:
- Hand back the vehicle with no further cost to yourself and walk away
- Pay off the GMFV amount and clear the loan or you can refinance that amount in a new contract and keep the car
- Trade-in your car, dealer value it as normal, any equity (the difference between the evaluation amount and the GMFV amount) carries over into the next new vehicle.
You structure a deposit that suits your budget within the deposit percentage allowed. If your trade has a value greater than the maximum deposit percentage, you can avail of Cashback. This allows you to have lower monthly payments because of the GMFV amount being placed at the end of the agreement. PCP has a very competitive APR rate compared to HP, therefore allowing you to drive a newer or higher spec’d vehicle.
There are strict limits on the annual mileage and if you exceed it during the agreement, then you may pay a penalty fee that is based on a cents-per-kilometre basis. The car also needs to be in reasonable condition when you hand it back, with no kerbing to the alloys, scratches to the bodywork or excessive wear and tear or staining to the interior, otherwise you face further costs. And, unless you decide to make the sizeable Optional Final Payment, then despite the large amount of money you outlay in deposit and PCM payments, you’ll never actually officially own the car as the contract price has not been repaid (The full price of the vehicle when you bought it). Additionally, if you only get the GMFV for the car at the end of the agreement and you want to go on to do another PCP on a new car, you will have nothing of monetary value from the first deal to place down on the second PCP as a deposit.
What is it?
HP stands for Hire Purchase.
How does it work?
This is a traditional method of buying a car without paying the full price in a lump sum and it’s basically a good, old-fashioned car loan – of a sort. Like PCP, you can pay a deposit of your choosing (this time, it’s not normally limited to a percentage of a vehicle’s value and you can choose to pay no deposit at all on some deals) and then you pay monthly finance on the rest of the car’s value, plus interest (set by the amount of APR). It’s like going to a third-party finance lender, such as a bank, and asking for a loan of, say, €25,000 to buy a car, and then paying that €25,000 plus interest back over a period of time; it’s just that the car manufacturers will provide HP themselves, through the financial arms of their business. Like PCPs, HP agreements can run over a variable number of years, so you can choose to spread your payments over anything between one and five years – although different time limitations might apply with different car dealers.
There are no conditions on HP agreements regarding mileage or condition. You borrow the price to change for the vehicle and agree to pay XX per month over the agreed period of the HP. The Hire purchase attached to the vehicle must be cleared in order to sell this onto another party (settlement).
The monthly payments will be considerably higher than on PCP because, minus the deposit, you’re then financing the entire outstanding value of the vehicle across the term of the agreement. There are also fewer choices at the end of an HP agreement because in essence, you’re just buying a car in its entirety – it’s simply that you’re spreading out the payment for the car over a number of years. The APR rates offered by the manufacturers’ financial services will normally not be as competitive as the APR rates you’d get from a bank or other lender, although this can change, especially around new registration periods when manufacturers offer multiple incentives on HP (and PCP, too) in order to encourage new car sales.
Which should I choose?
The simplest way to put it is this: do you want to legally own the vehicle at the end of the agreement and can you afford higher monthly payments, or are you happy to go on changing your car every few years for the newest and latest models, and you wish to keep your monthly payments low? If the former, you want to use HP, but be aware you’ll be paying more per month than with PCP. If the latter, PCP is a flexible and cost-efficient way to go – however, make sure you adhere to all the rules of the agreement, including mileage rates and vehicle condition upon return, to get the best from the finance arrangement.